Normally, if you make a tax loss in an income year you can carry it forward and deduct it in future years against income for tax purposes. You can generally carry forward a capital loss and offset it against a capital gain in later years. Also, you can claim a deduction for bad debts that you have actually written-off if they were previously included in a business’s assessable income.
If there is a change in ownership, to deduct a tax loss a company must either:
satisfy both the continuity of ownership test (COT) and the control test, or
satisfy the same business test (SBT).
To pass the COT for a particular loss, more than 50% of all the following rights in the company must be held directly or indirectly by the same natural persons throughout the ownership test period:
the right to exercise voting power
the right to receive the company’s dividends
the right to receive capital distributions.
Where in relation to a particular tax loss the COT or control test is failed, the loss can still be utilised if the conditions of the SBT are met. The SBT is satisfied if, throughout the prospective loss recoupment year, the company carries on the same overall business as it carried on immediately before the test time. Also if the company does not derive income from a type of business it did not carry on before the test time or a kind of transaction it had not previously undertaken.
The ATO’s view on “the same business” does not necessarily mean identical in all respects. The business can expand or contract provided it retains its essential character.
If you’re after more information regarding the above, please get in touch with the accountants at The Quinn Group. Submit an online enquiry or contact us on 02 9223 9166.